Gauhati High Court
Modi Revlon Pvt. Ltd vs Commissioner Of Income Tax on 24 November, 2016
Bench: Hrishikesh Roy, Nelson Sailo
THE GAUHATI HIGH COURT
(The High Court of Assam, Nagaland, Mizoram & Arunachal Pradesh)
Income Tax Appeal No. 4 of 2014
Modi Revlon Pvt. Ltd.,
(Formally known as Kamakhya Cosmetics & Pharmaceuticals Pvt. Ltd.)
House No.17, Rukminigaon,
Beltola Road, Guwahati-22.
......Appellant.
-Versus-
Commissioner of Income Tax,
Aaykar Bhawan, G.S. Road,
Guwahati-781005, Assam.
......Respondent.
For the Petitioner : Dr. Ashok Saraf (Sr. Adv.),
Mr. A. Goyal,
Mr. K. Choudhury,
Mr. P. Baruah,
Mr. Z. Islam. ....Advocates
For the Respondent : Mr. S. Sarma, SC, Income Tax. ....Advocate.
BEFORE
THE HON'BLE MR. JUSTICE HRISHIKESH ROY
THE HON'BLE MR. JUSTICE NELSON SAILO
Date of Hearing and Judgment : 24 th Novem ber, 2016
JUDGMENT AND ORDER (ORAL)
[Hrishikesh R oy, J.] Heard Dr. Ashok Saraf, the learned Senior Counsel for the appellant (assessee). Also heard Mr. S. Sarma, the learned Standing Counsel, Income Tax Department for the respondent.
2. This appeal is under Section 260-A of the Income Tax, 1961 (hereinafter referred to as "the I.T. Act") where the assessee challenges the order dated 13.11.2013 (Annexure-VI) in the ITA No.356/Gau/2013, whereby the ITR 4/2014 Page 1 of 8 learned Income Tax Appellate Tribunal, Guwahati Bench held against the assessee, on their claim to deduction, in respect of the provision of Central Excise Duty, for the assessment year 2009-2010. Thus the assessment of tax in respect of the provision, made by the Assessing Officer and the confirmation thereof by the CIT (Appeals), was upheld by the Tribunal.
3. This appeal was admitted on 13.06.2014 on the following substantial question of law.
"Whether the learned Tribunal was justified in not permitting the assessee to claim deduction of Rs.3,43,18,499 towards the Central Excise refund during the assessment year in question?"
4. The appellant was previously known as Kamakhya Cosmetics & Pharmaceuticals Pvt. Ltd. and the unit was setup in Guwahati's Bamunimaidam Industrial area, in pursuant to the new industrial policy resolution of the Central Government, notified on 24.12.1997. Under the Notification NO.32/99-CE and 33/99-CE, both dated 08.07.1999, the new industries setup in the designated tax free zones, were granted various tax exemption and concession, for a period of 10 years from the date of commercial production. The unit was setup in 2002 and was granted the Eligibility Certificate for refund of excise duty. As per the incentive mechanism, hundred percent refund of duty was given to the assessee until 31.03.2008 under the new industrial policy.
5. However the Government of India then issued the curtailment notification No.17/2008 on 27.03.2008 whereby, the refund entitlement was co- related to the "value edition" made by each industry and suffices is to note that the percentage of excise exemption benefit was thus reduced to 56% for the assessee, as compared to 100%, prior to the curtailment notification of 27.03.2008.
6. The aggrieved units including the appellant challenged the curtailment of benefits and the assessee's WP(C) NO.1707/2008 was allowed by the learned Single Judge and the impugned notification of 27.03.2008 was quashed and the Court held that the assessee is entitled to 100% excise duty exemption, as per the original notification dated 08.09.2009, prior to its amendment by the quashed curtailment notification of 27.03.2008.
ITR 4/2014 Page 2 of 87. However the Court verdict was not acceptable to the Excise Authorities and they filed the WA No.243/2009 and thus finality on the litigation on the extent of central excise exemption, is yet to be reached. Our Division Bench passed the first interim order on 11.08.2009, whereby the refund in terms of the verdict in the WP(C) No.1707/2008 was directed to be limited, to the amount offered by the excise authorities or in other words, the judgment of the learned Single Judge was rendered inoperative, during the pendency of the Appeal.
8. However in similar litigations emanating from the Gujrat High Court, the Supreme Court on 13.01.2012 in the SLP(C) Nos.28194 - 28201/2010 passed a different type of interim order on the following terms:-
"We have heard learned counsel for the parties on the question of stay of the impugned judgment. Having done so, we direct that operation of the impugned judgment shall remain stayed till further orders, subject to the petitioners' releasing to the respondents 50% of the amount due to them in terms of the impugned judgment on the respondents' furnishing solvent surety to the satisfaction of the jurisdictional Commissioner, within four weeks of their furnishing the said surety."
9. When the assessee pressed for similar interim order in the WA No.243/2009, this Court on 14.08.2012 modified its earlier order of 11.08.2009, in terms of the order of the Apex Court passed in the Gujarat cases.
10. The assessee filed their return of income for the assessment year 2009-2010 on 22.09.2009 showing total income of Rs.1,09,79,095/- and also made provision for central excise duty, to the tune of Rs.3,43,18,499/-. However the Assessing Authority on 15.11.2011 issued show-cause-notice as to why, the provision for the central excise duty, should not be disallowed for the assessment year 2009-2010. In their reply, the assessee submitted that since the litigation regarding entitlement to 100% exemption of duty has not attained finality, provision was made for the central excise duty liability, as a prudent assessee, who is following the mercantile system of accounting.
11. Thereafter the Deputy Commissioner, Income Tax under the assessment order dated 23.12.2011 computed the total income but in the process, disallowed the provision for central excise duty, for the claimed amount. Aggrieved by the assessment order, an Appeal was filed before the ITR 4/2014 Page 3 of 8 Commissioner of Income Tax (Appeals), Guwahati. However the Appeal was rejected on 10.04.2013 (Annexure-V). Then the matter was taken to the Appellate Tribunal but the Tribunal under its impugned verdict of 13.11.2013 (Annexure-VI), declared that the assessee is disentitled to claim deduction in respect of provision for central Excise duty and thus the order of assessment was affirmed.
12. It is important to note here that the company claimed refund of Basic Excise Duty paid from PLA, in terms of the notification No.32/99 but the refundable duty was restricted to maximum 56% by the subsequent notification No.27.03.2008. The assessee was successful with their challenge to the curtailment notification, before the learned Single Judge but the departmental challenge to the learned Single Judge's order is now awaiting the final decision in the SLP(Civil) No.11878/2015 (Union of India Vs. Kamakhya Cosmetics & Pharmaceuticals Pvt. Ltd.).
13. In the notes to the accounts, the assessee was claiming refund of basic excise duty from PLA, in terms of the govt. notification No.32/1999, but because of the curtailment notification of 27.03.2008, the refundable amount was reduced to 56% of the total duty payable, w.e.f. 01.04.2008. Thus resulting in lower refund of Rs.3,43,18,499/- for the assessment year under consideration. The assessee had made provision in their accounts, to take care of the excise tax liability in the event the departmental challenge is upheld by the higher Court. This was perceived by the assessing officer to be only provisional and not ascertained liability and thus the show-cause notice was issued on 15.11.2011 to seek explanation as to why, the claim on account of provision for central excise duty for Rs.3,97,62,512/-, should not be disallowed, for the assessment year 2009-10.
14. In their reply letter of 23.11.2011 the assessee mentioned about the departmental challenge to the decision of the learned Single Judge, who in the WP(C) No.1707/2008 had quashed the curtailment notification of 27.03.2008 and hence contended that, the statutory liability can be claimed in the year, in which dispute arises. However, the assessing authority considered the provision made by the assessee as contingent liability and opined that putting aside money which may become expenditure on the happening of an event, is not expenditure ITR 4/2014 Page 4 of 8 as the liability to pay tax will arise only when, the litigation is finally decided. It was further held that only such expenditure for a liability actually existing at the time, is deductible for the income tax purpose but setting aside money which may become expenditure on the happening of an event, is not expenditure and thus the future provision made by the assessee was declared to be disentitled for deduction by the assessing authority, through his order dated 23.12.2011. As earlier noted, the appellate authority as well as the Appellate Tribunal have upheld the assessment order and accordingly the assessee questions those decisions in this Appeal.
15.1 Dr. Ashok Saraf, the learned Sr. counsel submits that when the assessee follows the mercantile system of accounting, they are entitled to make provision for their tax liability in the books even if, such liability may be determined at a future date and as the obligation of tax liability is not finally decided and the matter is pending in the Supreme Court, the provision made for payment of excise duty, must be deducted for the concerned assessment year.
15.2 The appellant contends that the assessee as a prudent business organization is bound to take into account their tax liability and since provision is made bonafide to take care of the excise duty liability, the assessee is entitled to deduction for the amount, kept aside towards taxation.
16.1 On the other hand, Mr. S. Sarma, the learned standing counsel for the Income Tax Department submits that the provision made by the assessee is nothing more than a contingent liability which may or may not become expenditure at a future date and therefore, he contends that the disallowance of the provisional arrangement in the accounts, was perfectly justified in the present case.
16.2 The revenue lawyer relies on Commissioner of Income Tax Vs. Ideal Sheet Metal Stampings & Pressing (P) Ltd. reported in (2007) 290 ITR 295 (Guj) to contend that deduction can be allowed under the Income Tax law only for tax already paid and not for un-finalised tax liability.
17. The submission made by the rival counsel has received due consideration of the Court.
ITR 4/2014 Page 5 of 818. In the mercantile system of accounting, tax liability for the accounting period cannot be ignored by the assessee even if the liability is disputed in a legal forum and the provision for excise duty through entries in the books of accounts can be said to be a conservative practice of a prudent assessee. In Kedarnath Jute MFG. Co. Ltd. Vs. Commissioner of Income-Tax reported in (1971) 82 ITR 363 (SC), the Supreme Court opined that the assessee maintaining accounts on the mercantile system, was fully justified in claiming deduction of the tax amount, for which it became liable under the law during the relevant accounting year and the situation is no different even when the issue of tax liability is litigated, in the higher forum.
19. The Andhra Pradesh High Court in Commissioner of Income-Tax Vs. Investigation and Security Service (India) P. Ltd. reported in (1990) 182 ITR 358 was examining the business expenditure claim in the accounts of the assessee, where the liability issue of the assessee under the ESI Act was pending in the Court. In that context, the Division Bench opined that when the appeal is pending and finality is not reached on the liability of the assessee, the provision made towards the statutory liability during the assessment year under consideration, is entitled to deduction of the sum kept aside by the assessee.
20. For another assessee following the mercantile system of accounting, the Kerala High Court in Abad Fisheries Vs. Commissioner of Income- Tax reported in (1995) 213 ITR 694, held that the provision, made towards purchase tax liability the payability of which is disputed, is deductible for the relevant assessment year as the Court considered the provision made for payment of duty to be an act of prudent business habit. Thus the assessee's claim to deduction for the provisional amount in the accounts was found to be entertainable, in the following words:-
".............
The principle emanating from the above discussion is that a provision in the accounts made by an assessee following the mercantile system of accounting, for liability to sales tax, (though disputed) is yet liable to be allowed as business expenditure, if there was a bona fide reasonable apprehension on the part of the assessee that the amount will become payable. Of course, it is not every fanciful claim, based on the ipse dixit of the assessee that could form the basis of any claim for deduction of such liability. But if the assessee had a genuine ground, or reasonable ITR 4/2014 Page 6 of 8 basis, for apprehending that the liability may be cast on it, having regard to the view adopted by the concerned Sales Tax Department, or having regard to the case of the assessee himself or other similar assessees or otherwise, the claim cannot be rejected merely because it is disputed. It could not then be said that the assessee had acted unreasonably or fancifully on misplaced apprehensions in making the provision. The court has to consider what a prudent businessman would have reasonably done in the state of affairs in which the assessee was placed at the time the provision was made. We do not find anything in the decision of the Supreme Court in CWT v. K.S.N. Bhatt [1984] 145 ITR 1 on which standing counsel for the Revenue relied, militating against what we have stated above.
.........................."
21. In the same line, the Allahabad High Court in Commission of Income-Tax Vs. J.K. Synthetics Ltd. reported in (1983) 143 ITR 771 also declared that even when the assessee is resisting the claim of the Excise Authorities, it is not debarred from claiming deduction on account of excise duty liability, as it follows the mercantile system of accounting and it was held that such assessee can legitimately claim deduction in respect of its tax liability even if such liability have not been quantified finally and the liability is being disputed in a court of law.
22. While the above decisions support the case projected by the appellant, the Revenue relies on Ideal Sheet Metal Stampings & Pressing (P) Ltd.(supra), where the Gujarat High Court opined that only when the tax amount is paid by the assessee, the same becomes deductible and keeping aside the taxable amount for the disputed liability, will not entitle the assessee to claim deduction. On scrutiny of facts of the cited case, we find that, the disallowance of business expenditure under Section 43B of the IT Act was under
consideration, where the assessee collected the excise duty but had not paid the same to the govt. treasury. Thus the recovery of excise duty was considered to be trade receipts in the hands of the assessee, but since the amount was not paid to the Government Treasury, the unpaid amount was found to be disallowable to deduction, under Section 43B by the Court. But the Gujarat case in our considered opinion is distinguishable in as much as, the decision there was in the context of the claim under Section 43B of the IT Act. It was not a case of making provision for un-finalised tax liability, which is what we are concerned ITR 4/2014 Page 7 of 8 with in the present litigation. Therefore, according to us, the decision in Ideal Sheet Metal Stampings & Pressing (P) Ltd.(supra) cannot help us answer the substantial question of law, framed in the present case.
23. The extent of liability of central excise duty payable by the assessee for the assessment year 2009-10, will flow from the final verdict on the legality of the curtailment notification No.17/2008-Central Excise dated 27.03.2008 and although the notification was quashed in the WP(C) No.1707/2008, the consequential departmental challenge to the verdict of the High Court, is awaiting finality in the Supreme Court. Thus the precise amount of excise duty payable in the concerned year has remained inconclusive and therefore the reflection of the disputed amount in the books of accounts cannot be said to be an unreasonable act. In our understanding, a prudent assessee following the mercantile system, can certainly make provision for expenditure towards tax liability, even though the assessee may dispute the departmental claim but when the litigation is not yet finalized, it cannot be said with authority that the provision made will never be categorized as expenditure for the concerned assessment year.
24. That apart, if the Supreme Court finally declares that the curtailment notification of 27.03.2008 is legally unsustainable, the revenue will not suffer any prejudice since the department can bring the provisional amount to tax, under Section 41(1) of the IT Act. Therefore we are of the considered opinion that the substantial question of law framed in this proceeding has to be answered in favour of the assessee and against the revenue. Having answered thus, we set aside the respective impugned order(s) dated 13.11.2013, 10.04.2013 and the assessment order dated 23.12.2011, in so far as the disallowance of the central excise provision made in their books of accounts by the assessee. The appeal stands allowed in these terms.
25. With the above order, the case is disposed of by leaving the parties to bear their respective cost.
JUDGE JUDGE
Roy
ITR 4/2014 Page 8 of 8